I thought I would share several of the Pangolin IC trades for this week. Most folks here are stock traders like me, but lately I have been looking at options strategies that might generate steady income with a low risk profile. I focused in fairly quickly on a strategy known as an "Iron Condor". An Iron Condor is a fixed risk, directionally neutral option strategy that makes money as long as the underlying index or stock does not move more than a specified amount prior to option expiration. As a seller of these contracts, time decay (theta) is on your side, and appropriate positioning of the puts and calls can provide a 90+% likelihood of the trade closing profitably.

Within Pangolin IC I only trade Iron Condors on the ETFs for the major indices (SPY and IWM), and I usually try to include one on GLD if the premium is high enough. With these ETFs large price dislocations are uncommon, unlike higher volatility stocks where earnings can cause a 5-10% move overnight. The condors are established with a delta for each wing of 0.10 or less (delta is the statistical likelihood of a losing outcome, so 0.10 means a 10% chance of losing and a 90% chance of winning).

I also use only weekly options - these options have a much greater time decay and traditional monthly options, which as a seller works to our benefit. And frankly it is easier to sell risk where the market WILL NOT go than it is to take risk trying to predict where it WILL go. Iron Condors are one of the most reliable option strategies for generating steady income growth regardless of market direction. This is not rocket science - it is a simple and straightforward application of statistics to market activity.

So for the next few weeks I thought I'd let folks see the trades and learn about this option strategy. As always, thoughtful discussion is both expected and encouraged.

As long as the price of IWM does not close above 116 by the end of the day next Friday, the call spread will return $220 before commissions against a risk of $2000 (11%). Similarly as long as the price of IWM does not close below 108 by the end of the day next Friday, the put spread will return $220 before commissions against a risk of $2000 (11%).

So if IWM stays within the range of 108 - 116 by the close of trading next Friday, this IC will net $440 against a total at risk of only $1780 (since only one side could be a loss, the total at risk is only one side or $2000 minus the $220 profit made from the other side). Potential return before commisisons of 24.8%, with an 88% likelihood of having the condor spreads expire profitably.

As long as the price of SPY does not close above 197 by the end of the day next Friday, the call spread will return $160 before commissions against a risk of $2000 (8%). Similarly as long as the price of IWM does not close below 188 by the end of the day next Friday, the put spread will return $180 before commissions against a risk of $2000 (9%).

So just like in the previous trade, as long as SPY stays within the range of 188 - 197 by the close of trading next Friday, this IC will net $340 against a total at risk of $1860. Potential return before commisisons of 18.3%, with a 90% likelihood of having the condor spreads expire profitably.

I wanted to get the other side of this condor (buy the 126 call and sell the 124 call) but could not get it at a spread price of at least 0.05. Below that amount the trade return just isn't worth it. As long as the price of GLD does not close below 116 by the end of the day next Friday, the put spread will return $140 before commissions against a risk of $2000 (7%).

I'll update the stats on these trades as they progress to expiration next week - I'm assuming a starting equity of $25,000 for an imaginary account trading this. That means only $5640 or about 22% of the equity is in trades. Assuming all goes as planned the return will be $920 before commissions, or about 2-3% on starting equity after commissions - in about a week.

At 20 contracts each, the commissions on these trades will cost about $38 for each spread ($19 per trade) so the realized profit after taking these out will be more like $730. I'll record all costs here as these play out over the course of the next 9 days. Some brokers will charge no commission to close an option that is worth less than 0.05, some charge no commission for options to expire, others charge for both. This being a paper trade, I'll be using Interactive Brokers' fee structure to model these costs.

So if IWM stays within the range of 108 - 116 by the close of trading next Friday, this IC will net $440 against a total at risk of only $1780 (since only one side could be a loss, the total at risk is only one side or $2000 minus the $220 profit made from the other side).

The sum of the three trades risk is as I quoted (no profit offset on GLD since there is only one side to the condor).

The max loss is always larger than the max gain in this trade, but you need to think longer term - in any 10 trades we will have 9 wins at $340 and one loss at $1860. That means you make $1200 over 10 trades, or $120 per trade. That is your expectancy and it is equal to 6% of the amount at risk. Not too bad.

And more often than not the actual loss is less than the max loss (which is only hit if the price goes beyond the outer option in the spread). If you are trading multiple ICs you can mitigate any large loss with several smaller wins (although you are also increasing your probability of taking a loss since you are trading more ICs).

Today's action is exactly what you DON'T want when trading iron condors - a sudden and significant move in either direction that places the trades under pressure. This is really only happening in the IWM call spread, which has moved from a delta of 0.11 to 0.32. The current price is now only about 0.4 SD from our condor, which definitely increases the risk. However, we have a week to see where things go, and I'm not one to cut and run when the heat is turned up a little.

All other spread deltas are even lower than before, and are not showing any risk signals.

If you are thinking this can be done with a small account, then no - you don't know when the big loss will come. If it comes first it will wipe your $2000 account out.

I would not put into these type of trades any more than 1/4th of my trading account. Note that I am using an initial equity of $25,000 in this thread, which would be at the ratio I feel comfortable.

You are also confusing "money at risk" with equity. You see a typical return of 6% on "money at risk" but to be safe you need to divide that by 4 to get what your total account sees as a return. Given these are weekly option plays, that still is about 1-2% per week after commissions.

I trade a similar way, trading indexes starting at 10 delta. However, there are many differences in our approaches as well: Here is what works well for me:

I trade RUT, SPX, and NDX ICs on monthly expirations. Instead of selling 20 contracts collecting 5-10 cents premium , I sell 1 contract at $2.00 credit for a full iron condor since these indexes have higher notional values. The difference in commissions expense is dramatic. There is a tradeoff in the liquidity of these larger indexes as compared to the smaller versions. Obviously, SPY is the gold standard for liquidity, but you can get filled at a reasonable price in the larger priced indexes if you are patient and donít chase.

I also trade at 20 points wide (25 points w/ NDX). Since I manage my risk against the short strike, the width of the spread doesnít make a lot of difference from a risk standpoint. It does, of course, increase capital at risk, and the premium collected. In the case of a 20 point wide spread, the capital at risk is $2K for 1 contract.

Initiate the trades with enough time for the premium to erode. For monthly contracts, I trade between 50 and 40 days to expiration.

One clear way to improve the number of winners is to buy back the spread at 50% of the original credit. See the following Tasytrade video that talks about the edge this trade management technique adds. Tasytrade is a free options trading education tool, but you do need to register. https://www.tastytrade.com/tt/shows/market-measures/episodes/11348

I collect about 10% premium and buy back the contracts at 50%, so I am trying to keep 5% of the capital at risk for any expiration. That is a very sweet return.

Finally, I wonít try to sell credit spreads when the VIX is below 13.5 (it is currently 11.4) Even the 10 delta strikes are too close to ATM when the implied volatility of the market is so low. Better to trade long calls and puts when the IV is low.

I'll keep this tracking going - odds are now basically 50/50 that the IWM IC will close at a loss. Too close to call but to exit this spread now would be to take a large loss (almost $1200). In statistical analyses, this happens periodically and about 2/3rds of the time it comes back inside the inner option strike price. Still not the 90+% odds that were in play when the trade was placed ...

I actually like that my first post on this is in trouble - I think it is far more informative to show a system's weaknesses than its strengths (still, I want it to close profitably and will wait and see how it plays out).

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